This article originally appeared on the New York Law Journal.
The cryptocurrency enforcement landscape continues to evolve with several important developments this past week, including the appointment of a “Crypto Czar,” an enforcement action against a “Blockchain Evangelist” and a government official’s praise of virtual currencies as a “modern miracle” that “will proliferate to every economy and every part of the planet.” In the paragraphs that follow, we analyze these legal developments and their implications for the blockchain and cryptocurrency communities.
All Hail the Crypto Czar
On June 4, the U.S. Securities and Exchange Commission (SEC) announced the appointment of veteran SEC attorney Valerie Szczepanik as associate director of the Division of Corporation Finance and senior adviser for digital assets and innovation. In her capacity as the SEC’s “Crypto Czar,” Szczepanik will coordinate the SEC’s application of U.S. securities laws to emerging digital asset technologies and innovations, including Initial Coin Offerings (ICOs) and cryptocurrencies.
Szczepanik is well versed on these issues. During her two-decade tenure at the SEC, Szczepanik has held several prominent roles—including assistant director in the Division of Enforcement’s Cyber Unit, head of the Distributed Ledger Technology Working Group, and co-head of its Dark Web Working Group. She is involved with several pending crypto enforcement actions in New York federal courts—including the REcoin, Centra Tech, Inc., and Plexcorps cases—and was part of the team that investigated The DAO.
Szczepanik’s remarks about cryptocurrency at several conferences suggest a measured approach to enforcement. According to a May 2018 report, Szczepanik recently stated that the SEC is trying to strike a balance between protecting investors and facilitating the emerging technology: “We do not want to chill the markets.… The promise of blockchain technology is not one that we want to ignore.” Szczepanik suggested that many ICOs are designed not to launch a digital currency but rather to raise money and encourage speculative investment while simultaneously ignoring basic transparency and disclosure requirements. A May 2017 report suggests that she struck a similar tone while speaking on a cryptocurrency regulation panel: “If you want this industry to flourish, protection of investors should be at the forefront.”
Szczepanik also appears to be open to the possibility that some digital tokens are not securities. During the May 2017 event, she is reported as stating that the question of “whether a token is a security” hinges on a facts-and-circumstances analysis—which is a little more measured than SEC Chairman Jay Clayton’s “I believe every ICO I’ve seen is a security” statement from earlier this year.
The Fall of a “Blockchain Evangelist”
On May 29, 2018, the SEC announced that a California federal court granted its request for a temporary restraining order – followed by a preliminary injunction—against self-proclaimed “blockchain evangelist” Michael Alan Stollery (aka Michael Stollaire) and two of his companies: Titanium Blockchain Infrastructure Services, Inc. (TBIS) and EHI Internetwork and Systems Management, Inc. (EHI). In addition to freezing the defendants’ assets, which included digital wallets as well as traditional bank accounts, the court order granted expedited discovery and appointed a temporary receiver for TBIS and its subsidiaries and affiliates.
The SEC’s complaint, which was originally filed under seal, accuses the defendants of masterminding a “create and inflate” scheme that raised over $21 million through the sale of digital assets called “BAR” and “TBAR.” The SEC has accused the defendants of “orchestrating a social media campaign based on false corporate relationships and false testimonials to establish a presence and seeming expertise” and “generating demand for their digital asset by offering various incentives and creating urgency so investors would invest in the ICO.” The complaint contains a full-page chart from the defendants’ offering materials that allegedly misrepresented TBIS’s customers, including the names and logos of thirty large companies and—even more brazenly—the Federal Reserve. The SEC has accused the defendants of making material misrepresentations and omissions as well as offering and selling unregistered securities.
Cryptocurrency—a “Modern Miracle”
On June 4, U.S. Commodity Futures Trading Commission (CFTC) Commissioner Rostin Behnam delivered a rousing speech about cryptocurrencies, explaining that while virtual currencies may be vexing many regulators, there is no doubt that the technology is transforming the world. The remarks were part of his keynote address on “Fostering Open, Transparent, Competitive, and Financially Sound Markets” at the Blockchain for Impact Global Summit in New York. Before a crowd gathered at United Nations headquarters, Commissioner Behnam gave an eyes-wide-open assessment of crypto technology and how it is “bewilder[ing]” regulators:
Some countries have outlawed virtual currencies. Others have new, strict laws to control them. Many countries simply don’t know what to do. Their policy is bewilderment. Or avoidance. And, some countries think virtual currencies are only a problem for developed countries like Switzerland, or Germany, or Singapore, or the United States.
But virtual currencies may—will—become part of the economic practices of any country, anywhere. Let me repeat that: these currencies are not going away and they will proliferate to every economy and every part of the planet. Some places, small economies, may become dependent on virtual assets for survival. And, these currencies will be outside traditional monetary intermediaries, like government, banks, investors, ministries or international organizations.
Commissioner Behnam stated that “[w]e are witnessing a technological revolution” that might be better described as “a modern miracle.”